MANAGEMENT ADVISORY SERVICES

TOPIC 4: FINANCIAL STATEMENT ANALYSIS

VERTICAL ANALYSIS Common – size financial statements

HORIZONTAL ANALYSIS Trend percentages and index analysis

CASH FLOW ANALYSIS Interpretation of Cash Flows inc. Free Cash Flow Concept

Price

GROSS PROFIT VARIANCE ANALYSIS Cost

Volume
FINANCIAL

STATEMENT Liquidity

ANALYSIS VOLUME
Solvency

Activity
FINANCIAL RATIOS
Profitability
Activity
Growth

Du Pont Model

FINANCIAL FORECASTING USING ADDITIONAL FUNDS NEEDED (AFN)

VERTICAL ANALYSIS
A technique in which each line item is listed as a percentage of a base figure in the statement.
 Comprehend or visualize the changes in individual items.
 Compare statements of two or more companies.
 Base item is always 100%.

HORIZONTAL ANALYSIS
Enables investors and analysts to see what has been driving a company’s financial performance over time, as well as identify
the trends and growth patterns.
FORMULA:
 Compare two or more periods 𝑀𝑜𝑠𝑡 𝑅𝑒𝑐𝑒𝑛𝑡 𝑉𝑎𝑙𝑢𝑒 − 𝐵𝑎𝑠𝑒 𝑃𝑒𝑟𝑖𝑜𝑑 𝑉𝑎𝑙𝑢𝑒
 Study of percentage changes 𝑃𝑒𝑟𝑐𝑒𝑛𝑡𝑎𝑔𝑒 𝐶ℎ𝑎𝑛𝑔𝑒 =
𝐵𝑎𝑠𝑒 𝑃𝑒𝑟𝑖𝑜𝑑 𝑉𝑎𝑙𝑢𝑒

CASH FLOW ANALYSIS

 Summarizes the amount of cash and cash equivalents
 Components of Cash Flow Analysis
o Cash from operating activities
o Cash from investing activities
o Cash from financing activities
o Disclosure of non-cash activities

FREE CASH FLOWS – the cash a company generates after accounting for cash outflows, to support operations and maintain
capital assets.

FORMULAS:
SP: CF from Operating Acts. Starting point is EBIT Starting point is Net Income
CF from Ope. Acts. XX EBIT x (1 – Tax Rate) XX Net Income XX
Interest Expense XX Non-cash Expense XX Interest Expense XX
Tax Shield on Int. Exp. (XX) ∆ in (CA – CL) (XX) Tax Shield on Int. Exp. (XX)
CAPEX (XX) CAPEX (XX) Non-cash Expense XX
Free Cash Flows XX Free Cash Flows XX ∆ in (CA – CL) (XX)
Capital Expenditure (CAPEX) (XX)
Free Cash Flows XX

1
 GROSS PROFIT VARIANCE ANALYSIS

Total sales this year XX (SP per unit this year – SP per unit last year) XX
Sales this year at last year’s price (XX) Multiply by: Sales Units this year (XX)
Sales Price Variance (SPV) / Sales Factor XX Sales Price Variance (SPV) / Sales Factor XX

Cost of Sales this year XX (Unit cost this year – Unit cost last year) XX
Cost of Sales this year at last year’s price (XX) Multiply by: Sales Units this year (XX)
Cost Price Variance (CPV) Cost Factor XX Cost Price Variance (CPV) Cost Factor XX

(Sales Quantity this year - Sales Quantity last year) XX (Sales Quantity this year – Sales Quantity last year) XX
Multiply by: Selling Price last year (XX) Multiply by: Unit Cost last year (XX)
Sales Quantity Variance (SQV) XX Cost Quantity Variance (CQV) XX

(Sales Quantity this year - Sales Quantity last year) XX

Multiply by: Gross Profit per unit last year (XX)
Sales Volume Variance / Quantity Factor XX

FINANCIAL RATIOS

TEST OF LIQUIDITY
RATIO FORMULA SIGNIFICANCE

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
1. Current Ratio / Measures the # of times that the current
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Banker’s Ratio / liabilities could be paid with avalailble
Working Capital Ratio current assets.
∗ 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑄𝑢𝑖𝑐𝑘 𝐴𝑠𝑠𝑒𝑡𝑠 ∗
Measures the # of times that the current
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
2. Acid Test Ratio liabilities could be paid with avalailble
cash and near cash assets.
∗ 𝐶𝑎𝑠ℎ + 𝑀𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠 + 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
𝐶𝑎𝑠ℎ 𝑎𝑛𝑑 𝑀𝑎𝑟𝑘𝑒𝑡𝑎𝑏𝑙𝑒 𝑆𝑒𝑐𝑢𝑟𝑖𝑡𝑖𝑒𝑠
3. Cash Ratio
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
4. Working Capital Activity Ratio (TURNOVERS)
Time required to complete one
𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠 ∗ collection cycle-from the time
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 receivables are recorded, then collected
, to the time new receivables are
a. Receivable
recorded again
Turnover
𝑁𝑜. 𝑜𝑓 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐷𝑎𝑦𝑠 𝑖𝑛 𝑌𝑒𝑎𝑟
∗ 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑔𝑒 𝑜𝑓 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 = Indicates the average number of days
𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 during which the company must wait
∗ 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑔𝑒 𝑜𝑓 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 = before receivables are collected.
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠
𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑀𝑒𝑟𝑐ℎ𝑎𝑛𝑑𝑖𝑠𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 Measures the # of times the inventory is
# 𝑜𝑓 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐷𝑎𝑦𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑔𝑒 𝑜𝑓 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = replaced during the period.
b. Inventory 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 Indicates the average # of days during
Turnover 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝐴𝑣𝑒. 𝐴𝑔𝑒 𝑜𝑓 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 = which the company must wait before
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝐶𝑜𝑠𝑡𝑠 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑 inventories are sold.
𝐴𝑣𝑒. 𝐴𝑔𝑒 𝑜𝑓 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒 + 𝐴𝑣𝑒. 𝐴𝑔𝑒 𝑜𝑓 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐶𝑦𝑐𝑙𝑒 =
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒𝑠
𝑇𝑟𝑎𝑑𝑒 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑟𝑎𝑑𝑒 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠
c. Trade Payables 𝑁𝑜. 𝑜𝑓 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐷𝑎𝑦𝑠 Indicates the length of time during which
Turnover 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑔𝑒 𝑜𝑓 𝑇𝑟𝑎𝑑𝑒 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠 = payables remain unpaid
𝑃𝑎𝑦𝑎𝑏𝑙𝑒 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑃𝑎𝑦𝑎𝑏𝑙𝑒
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑔𝑒 𝑜𝑓 𝑇𝑟𝑎𝑑𝑒 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝐶𝑟𝑒𝑑𝑖𝑡 𝑃𝑢𝑟𝑐ℎ𝑎𝑠𝑒
d. Cash Flow Cycle 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 𝐶𝑦𝑐𝑙𝑒 = 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐶𝑦𝑐𝑙𝑒 − 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑔𝑒 𝑜𝑓 𝑇𝑟𝑎𝑑𝑒 𝑃𝑎𝑦𝑎𝑏𝑙𝑒𝑠
Measures the movement and utilization
e. Current Assets 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑆𝑎𝑙𝑒𝑠 + 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝐸𝑥𝑝𝑒𝑛𝑠𝑒𝑠 (𝑒𝑥𝑐. 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑎𝑛𝑑 𝐴𝑚𝑜𝑟𝑡𝑖𝑧𝑎𝑡𝑖𝑜𝑛
of current assets to meet operating
Turnover 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
requirements
5. Working Capital to 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 Indicares relative liquidity of total assets
Total Assets 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 and distribution of resources employed
6. Working Capital 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 Indicates adequacy and activity of
Turnover 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑊𝑜𝑟𝑘𝑖𝑛𝑔 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 working capital

2
 TEST OF SOLVENCY
RATIO FORMULA SIGNIFICANCE
1. Times Interest 𝐼𝑛𝑐𝑜𝑚𝑒 𝑏𝑒𝑓𝑜𝑟𝑒 𝑇𝑎𝑥 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 Determines the extent to which
Earned 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 operations cover interest expense
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
Proportions of assets provided by
𝑇𝑜𝑡𝑎𝑙 𝑂𝑤𝑛𝑒𝑟 ′ 𝑠 𝑜𝑟 𝑆𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝐸𝑞𝑢𝑖𝑡𝑦
2. Debt-Equity Ratio creditors compared to that
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
𝐸𝑞𝑢𝑖𝑡𝑦 𝑀𝑢𝑙𝑡𝑖𝑝𝑙𝑖𝑒𝑟 = provided by owners.
𝑇𝑜𝑡𝑎𝑙 𝑂𝑤𝑛𝑒𝑟 ′ 𝑠 𝐸𝑞𝑢𝑖𝑡𝑦
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 Proportion of total assets provided
3. Debt Ratio
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 by creditors
𝑇𝑜𝑡𝑎𝑙 𝑂𝑤𝑛𝑒𝑟 ′ 𝑠 𝑜𝑟 𝑆𝑡𝑜𝑐𝑘ℎ𝑜𝑙𝑑𝑒𝑟𝑠 ′ 𝐸𝑞𝑢𝑖𝑡𝑦 Proportion of total assets provided
4. Equity Ratio
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 by owners
5. Fixed Assets to 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 Reflects extent of the utilization of
Long – term
Liabilities
𝐿𝑜𝑛𝑔 − 𝑡𝑒𝑟𝑚 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠 resources from long-term debt

6. Fixed Assets to 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 Measures the proportion of

Total Equity 𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦 owner’s equity to fixed assets
7. Fixed Assets to 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 (𝑁𝑒𝑡) Indicates possible over expansion
Total Assets 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 of plant and equipment
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 Test roughly the efficiency of
8. Sales to Fixed
management in keeping plant
Assets 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡𝑠 (𝑁𝑒𝑡) properties employed
9. Book Value Per 𝐶𝑜𝑚𝑚𝑜𝑛 𝑆𝑡𝑜𝑐𝑘 𝐸𝑞𝑢𝑖𝑡𝑦 Measures recoverable amount in
Share on Common the event of liquidation if assets
Stock
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝐶𝑜𝑚𝑚𝑜𝑛 𝑆𝑡𝑜𝑐𝑘 are realized at their book value
10. Times Preferred 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝑎𝑓𝑡𝑒𝑟 𝑇𝑎𝑥 Indicates the ability to provide
Dividend
Requirements
𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑅𝑒𝑞𝑢𝑖𝑟𝑒𝑚𝑒𝑛𝑡𝑠 dividends to preferred stockholders

11. Times Fixed 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝑏𝑒𝑓𝑜𝑟𝑒 𝑇𝑎𝑥𝑒𝑠 𝑎𝑛𝑑 𝐹𝑖𝑥𝑒𝑑 𝐶ℎ𝑎𝑟𝑔𝑒𝑠 Measures ability to meet fixed
Charges Earned 𝐹𝑖𝑥𝑒𝑑 𝐶ℎ𝑎𝑟𝑔𝑒𝑠 (𝑟𝑒𝑛𝑡 + 𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡 + 𝑠𝑖𝑛𝑘𝑖𝑛𝑔 𝑓𝑢𝑛𝑑 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡𝑎𝑥𝑒𝑠) charges
12. Sinking Fund
𝑆𝑖𝑛𝑘𝑖𝑛𝑔 𝑓𝑢𝑛𝑑 𝑝𝑎𝑦𝑚𝑒𝑛𝑡 𝑎𝑓𝑡𝑒𝑟 𝑇𝑎𝑥𝑒𝑠
Payments Before
Tax 1 − 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒

TEST OF PROFITABILITY
RATIO FORMULA SIGNIFICANCE
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐴𝑓𝑡𝑒𝑟 𝑇𝑎𝑥
1. Return on Sales 𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠 Determines the amount of income
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 earned on each peso sales
𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 / 𝑀𝑎𝑟𝑔𝑖𝑛 𝑅𝑎𝑡𝑖𝑜 =
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
2. Return of Total 𝐼𝑛𝑐𝑜𝑚𝑒 𝑏𝑒𝑓𝑜𝑟𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑏𝑢𝑡 𝐴𝑓𝑡𝑒𝑟 𝑇𝑎𝑥𝑒𝑠 Efficiency with which managers use
Assets (ROA) 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 total assets to operate the business

3. Return on Owner’s 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐴𝑓𝑡𝑒𝑟 𝑇𝑎𝑥 Measures the amount earned on the
Equity 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑂𝑤𝑛𝑒𝑟 ′ 𝑠 𝐸𝑞𝑢𝑖𝑡𝑦 owner’s or stockholders’ investment
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑎𝑓𝑡𝑒𝑟 𝑇𝑎𝑥 − 𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑𝑠 (𝑖𝑓 𝑎𝑛𝑦) Measures the amount of net income
4. Earnings Per Share
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒. 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐶𝑜𝑚𝑚𝑜𝑛 𝑆ℎ𝑎𝑟𝑒𝑠 earned buy each common share

5. Rate of Return on 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝐴𝑓𝑡𝑒𝑟 𝑇𝑎𝑥 Measures the profitability of current

Current Assets 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 assets invested
6. Rate of Return Per
𝑅𝑎𝑡𝑒 𝑜𝑓 𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐴𝑣𝑒. 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 Shows profitability of each turnover of
Turnover of
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 current assets.
Current Assets

MARKET TESTS
RATIO FORMULA SIGNIFICANCE
1. Price / Earnings Ratio 𝑃𝑟𝑖𝑐𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 Indicates the number of pesos required to
(P/E) 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 buy P1 of earnings
𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 Measures the rate of return in the investor’s
2. Dividend Yield
common stock investments
𝑃𝑟𝑖𝑐𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒
𝑂𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 Indicates the proportion of earnings
3. Dividends Pay – Out
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 distributed as dividends
Determines the portion of earnings used for
4. Plow – back Ratio 1 − 𝑃𝑎𝑦𝑜𝑢𝑡 𝑅𝑎𝑡𝑖𝑜 internal financing
𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 Determines how much will be earned for
5. Earnings Yied
every P1 invested
𝑃𝑟𝑖𝑐𝑒 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒

3
 DU PONT EQUATION
Du Pont = Net Profit Margin X Asset Turnover X Equity Multiplier
= Operating Income Total Sales Total Assets
Total Sales Total Sales Shareholder’s Equity

FINANCIAL FORECASTING USING ADDITIONAL FUNDS NEEDED

A way of calculating how much new funding will be recorded.

SIMPLIFIED FORMULA:
AFN = Projected increase in assets – Spontaneous Increase in Liabilities – Any Increase in Retained Earnings

FORMAL FORMULA: AFN = (A*/S0)∆S – (L*S0)∆S – MS1 (RR)

Wherein:
A – assets tied directly to sales
L – spontaneous liabilities that are affected by sale
S0 = the previous year’s sales
S1 = total projected sales for next year
∆S = the change in sales between S0 and S1
M = profit margin
MS1 = projected net income
RR = the retention ratio fron net income (equal to 1 minus the dividend payout ratio; disregard if dividends are not declared)